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Building tomorrow’s dairy industry

John Wilson Published on 22 March 2010

2009 was a rough year for dairy farmers. Many faced the worst economic crisis of their lives. Although there are signs of life in the dairy economy, recovery is coming much slower than expected. Today the dairy industry finds itself at a crossroads: It can keep the status quo, or it can build a decidedly stronger future.

Rebuilding the dairy industry as it was means relying on federal dairy programs that haven’t worked particularly well. Producers are low on equity and heavy with debt, uncertainty looms around financing opportunities and profit margins, and price and cost volatility makes it nearly impossible to plan for the future. The entire industry is struggling to find the ideal solution.

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Industry-wide change
To build a stronger future the industry must change its fundamental structure so producers are less vulnerable to price swings and are protected against input costs that outpace market prices. How exactly to do that is being studied and debated by everyone from state governments, federal legislators and industry committees to cooperative boards of directors, councils and associations.

While there are many ideas and proposals, there are a few basic tenets that should be included in any new system. It should:
• Be market-oriented to allow for growth, both domestically and internationally
• Be responsive to quickly changing market conditions
• Have financial participation by all producers
• Be global in nature to consider the impact of imports and exports
• Be national in scope, with the ability to implement regionally

The most successful scenario will be a new system that is industry-run, with producers at the center of the decision-making process. Ideally, an industry-run advisory board could be given authority to implement a broad range of initiatives to manage the extremes of volatility and identify opportunities among producers, cooperatives and customers.

The new program must also be proactive in managing growth. Supply and demand imbalance has caused extreme price volatility, resulting in drastic swings in the price dairy farmers are paid for their milk. Although a number of specific, targeted actions were taken in 2009 to improve the supply-and-demand situation, the new system must allow for earlier and faster action, providing mechanisms to quickly adapt to changing market forces and stabilize prices.

A successful new system will require legislative support and regulatory enforcement. Our industry must come together to formulate a plan that is conducive to quick action by Congress. It must be a system that reduces price volatility for the entire industry, from producer to consumer.

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Clearly, this is a big task. The future of the dairy industry depends on developing a new system in which the industry effectively manages growth to match up with not only domestic demand, but export opportunities as well. The result will be reduced price volatility.

While it is crucial that a new pricing structure and plan be thoroughly and carefully vetted, time is of the essence.

What dairy producers can do
Until changes are made, there are a few things producers can do to mitigate their risk in 2010.

Currently, price risk management tools are available to help producers secure their future. Price risk management is about more than milk price – it’s about managing margins (the spread between milk price and basic feed costs).

For example, a fixed-price forward contract allows producers to fix their price for up to 24 months in the future. Alternatively, a minimum price forward contract protects against the Class III milk price falling below a “floor” while allowing the producer to participate in the full upside potential in the market. Another tool, the minimum/maximum forward contract, establishes both a floor and a ceiling price in the Class III market that can be done at a lower cost.

Each risk management program comes with its own advantages and disadvantages, and in the end, it is up to each producer to decide what is best for his or her business. But all producers should be informed and know the various options available to help reduce risk.

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Role for dairy cooperatives
In addition, dairy producers can use dairy cooperatives to get the information and tools they need to enhance their livelihoods. Beyond special risk management programs, producers can take advantage of a variety of services offered, including insurance, farm supplies, legal and consulting services and more.

In 2010, dairy cooperatives will have the important responsibility of continuing to provide traditional milk marketing and other member-focused services, while helping to shape the industry’s future on behalf of their producer-owners.

Throughout the next year there will be a lot of talk about how to structure a new growth management program, yet producers will still be operating under the current system. Dairy cooperatives must continue to serve their members during this transition, ensuring fair treatment, bargaining for the best milk price, helping to balance supply and increase demand by converting milk to value-added products, and advocating for policies and programs that help producers improve efficiencies and increase profit margins.

Finally, cooperatives must also strongly defend the Capper-Volstead Act – the federal law that allows individual farmers to collaborate in cooperatives without violating federal antitrust laws. The Capper-Volstead Act is being attacked by opponents and, in 2010, will likely be challenged. Farmers must fight for their legal right to join together in cooperatives in order to be competitive in an increasingly consolidating industry.

Membership in a cooperative brings value, whether prices are up or down. But in times like these, cooperatives are especially important for dairy farmers.

2010 is a turning point for the dairy industry. We will either settle for the status quo or forge a new path. The latter takes courage and compromise, and it won’t be easy. But already the best minds in the industry are working to create a structure aimed at preventing the type of crisis we experienced in 2009. The process depends on all of us playing our part and working together to build a stronger dairy industry. PD

DFA proposes Growth Management Plan
DFA has proposed a growth management concept called the Dairy Growth Management Initiative (DGMI), which, if enacted, would replace the current CWT program, allow for growth and help minimize milk price volatility, while enabling the industry to quickly respond to changing market conditions. DGMI would be:

• Run by an advisory board, consisting mostly of dairy producers appointed by the Secretary of the U.S. Department of Agriculture (USDA). The balance would be comprised of other industry leaders, including at least one consumer representative, also appointed by the Secretary.

• Producer-governed with the authority to implement a broad range of initiatives to address milk supply and demand in the U.S.

• Funded through a congressionally mandated, industry-wide assessment of up to 25 cents per hundredweight, which would replace the current voluntary CWT 10-cent contribution.

• USDA’s oversight would be limited to auditing the program to assure money is collected and allocated appropriately, and to appointing board participants.

DFA is collaborating with other cooperatives and industry groups to advance this plan and achieve congressional support.

John Wilson
  • John Wilson

  • Senior Vice President,
  • Marketing and Industry Affairs
  • Dairy Farmers of America, Inc.

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